Archive for the ‘Contracts’ Category

Ever try to license software or provide SaaS to a Fortune 500 company or some other high profile company? Did they insist on working from “their paper”? You know enough not to simply hope for the best and sign whatever contract they put in front of you, but you also don’t want to delay further a months-long sales effort over the paperwork. What do you do?

The Customer’s Form Contract

You want the deal, so you tell them to send you the draft. BigCo sends you its contract. It’s a long, complex document that rivals the King James Bible. You send it to your lawyer, who spends an hour or two reviewing it. The lawyer comes back with a list of concerns that go something like this:

The intellectual property terms don’t apply to the deal you’re trying to close. You simply want to provide access to your SaaS platform, and the contract has your company assigning over all of its IP – effectively preventing you from offering a SaaS platform to your other customers.

The security terms are totally overbearing. You’ll only receive publicly available, anonymized information, but the contract has your company submitting to monthly penetration tests, annual SOC 2 Type 2 audits across all five principles, and background checks on all your employees by a third party of your customer’s choosing.

The renewal and termination provisions give your customer a right to terminate at any time, for any reason, with a pro-rata refund.

You then call your counterpart at BigCo and negotiate the renewal and termination provisions, while your lawyer rewrites the intellectual property and security terms. You’ve now spent your own relationship capital negotiating a key term, you’ve spent money on legal expenses, and the revisions haven’t even been sent to your customer’s attorney yet. Worse still, you’re beginning to wonder why they sent over a contract that requires this much hassle.

Here’s the problem: When they told you they wanted to work from their paper, you felt like you were in no position to negotiate. You spent a long time to get the deal to that point, and the economics were finally set. Your counterpart may have even said, “Our legal can be a pain. I don’t like having to deal with them, but it’s how we do things at BigCo.”

A Better Way Forward

Assuming you are even willing to work from their form, consider an alternative. Imagine instead that you told your counterpart at BigCo, “Certain legal items are really important to us. They are X, Y and Z. If we can work from a contract with those included, I’m confident the lawyers can hammer out the rest and we can quickly get this deal done.”

So what are X, Y, and Z? Here’s a sample of issues that are critical in many software deals:

Intellectual Property – Are you assigning your software (literally giving the code and full ownership to your customer), licensing it and reserving ownership rights to yourself, providing user access to a SaaS platform, or something else?

Data – If you’re providing a SaaS platform, who is responsible for the content of the data uploaded into it? Who owns it? What can (and can’t) you and your customer do with it?

Termination – Under what circumstances can your customer terminate the agreement?

Obviously that’s not an exhaustive list, and critical issues vary from deal to deal and company to company. Ideally, you already know your X, Y and Z.

When you communicate key legal concerns the moment you are willing to concede on using their paper, you send some important signals to BigCo:

You’re willing to work with them if they’re willing to work with you.

You know that the legal terms matter, and you know which issues are especially critical for your deal.

You want to learn quickly whether they will insist on dealbreaker terms.

You will expedite the process to get the deal done.

If your counterpart at BigCo also wants to get the deal done soon, your message will reach BigCo’s legal department. And if BigCo’s legal department takes cues from your counterpart, you’re much more likely to receive an agreement that actually applies to your deal. This saves everyone time and money in the long run.

But suppose your counterpart doesn’t want to close quickly or doesn’t relay your message, or suppose the legal team doesn’t take cues from your counterpart. Suppose the contract you receive from BigCo’s legal department isn’t any better. Are you really any worse off than if you had not tried this approach?

A common misperception is that all Confidential Disclosure and Nondisclosure Agreements (NDAs) are virtually the same. In other words, many people think that it doesn’t matter whether an NDA is for a vendor, customer, employee, strategic, or potential sale transaction—a standard NDA should be sufficient. The truth is, they are and should be different. This is especially true in the company sale context.
Here are some ways that company sale NDAs can be different:

(1) Definition of confidential information

The description of what constitutes confidential information in typical NDAs does not include a number of things that a seller often wants kept confidential in the sale context—most notably, the fact that the seller is considering selling the business or that the buyer and the seller are interested in a sale transaction.

(2) Permitted use of confidential information

A general use restriction seen in “standard” NDAs is often insufficient as a limitation on use of confidential information shared in the company sale context. Moreover, if the buyer is in private equity or is another type of financial sponsor, a limitation on using the confidential information only in connection with the consideration of a potential acquisition of the seller may not be adequate. It often does not limit the disclosure of confidential information to other potential buyers as part of a “clubbing” deal, which sometimes is counter to the seller’s desire to create competition among suitors.

(3) Who the buyer can share the information with

Many NDAs typically restrict disclosure of information by the recipient to those within the recipient’s organization who “need to know” for the stated purpose. Often, in the company sale context, buyers need to also share that information with financing sources, investment bankers, transaction consultants, lawyers, and others.

(4) Non-solicitation of seller’s employees and customers

While it is uncommon to see restrictions on solicitation of a party’s employees and customers in the typical NDA, it is more common to see the matter covered in a company sale NDA as those relationships are more vulnerable in the sale context, especially if the employees and customers know that the seller is interested in selling.

(5) Antitrust requirements

If the buyer is a competitor, provisions and processes should be included that address antitrust concerns.

(6) Seller point person

It is somewhat common to see an individual within the seller’s organization designated as a point person for whom the buyer must work through to obtain confidential information. The intentional procedural bottleneck is designed to ensure that relevant people within the seller’s organization are appropriately briefed, that certain people within the seller’s organization are not contacted by the buyer, and to some extent, keep track of the confidential information that is disclosed.

(7) Seller’s form of NDA

A common issue in many commercial transactions is whose form NDA should be used. In the company sale context, however, use of the seller’s form of NDA is the norm. Also, it is more common to see the NDA in the form of a letter, countersigned by the potential buyer, rather than the standard form of two-party agreement.

Because of some of the unique issues that arise in company sale transactions, sellers should craft the form of NDA they use with those unique issues in mind and not rely on forms or templates used in other contexts.

Closing software deals with less legal hassle demands more than just a good agreement – it requires a well-informed and well-equipped sales team. If your company offers SaaS or licenses software to other businesses, consider these additional tips to close deals quickly and at a lower legal cost.

Build a Legal FAQ

Your team should know most of what’s in its agreement and why it’s there. Customer stakeholders who are not attorneys are quite likely to ask your sales team questions that are both ‘legal’ and important to the deal, long before an attorney is involved. Getting the answers right demonstrates your company’s experience, preparation, and ability to ensure customer success, all while speeding the deal to close. Getting the answers wrong – or not knowing the answers – simply decreases the likelihood of closing the deal or increases customer acquisition cost for no good reason.

A few examples of questions for which most sales teams should know the answers, particularly in SaaS deals:

What are the details of your SLA? Do you offer credits or refunds? If so, how are they calculated? What’s been your uptime historically? When do you schedule routine maintenance? Are you using third party hosting providers? If so, who?

Do you use data uploaded by your customers into the platform for any reason other than providing your service? If so, what are you using and why are you using it?

Are customers able to download their data from your platform? If so, how quickly can it be done? In what formats? Where are you storing that data?

You may even find it helpful to develop a ‘legal’ FAQ written by your attorney with guidance from your sales leaders. Sales leaders can ensure the FAQ includes answers to the legal-related questions they commonly field in the trenches, while your attorney can ensure the answers reflect what’s in your agreement. When new questions come up on a recurring basis, your attorney can also update your agreement where appropriate.

Create a Decision Tree & Fallbacks

Assuming you’ve closed enough software deals to know what is and is not negotiable in your agreement, how can you be more efficient? When you’re part of a small startup, virtually everything filters up. But, as your company grows, that cannot continue when the number of deals grows as well. What types of matters need to be on your plate – and what types of matters can you leave to the head of sales? Are you leveraging what you negotiated in prior deals?

They say the most important question in law is, “Who decides?” That’s absolutely true when closing a software or SaaS deal. If certain issues are commonly negotiated and you concluded they are minor, then consider whether it’s more efficient for your company to leave those issues to someone else. If other issues are more significant, then make clear who does and does not have the power to negotiate those items.

When you leave certain issues to someone else, provide alternative provisions that you and your attorney wrote and approved. You can even create an alternative version of your contract with footnotes for each of those alternatives.

Train the Team

Obviously, these solutions will not matter if your team does not know how to use them. But by this point, you may be asking yourself whether they have the time for what amounts to legal training. After all, they are busy trying to close deals, and they want to stay focused on the big picture.

If you’re convinced that some basic tools and process can help your company close software or SaaS deals with less legal hassle, put those tools to good use. Build an FAQ and iterate on it. Document a decision tree. Provide written alternatives. Critically, take the time to train your staff on how to use them. An hour of legal training and negotiating during employee onboarding or annual meetings can prevent more expensive back and forth months later. At the very least, the materials become simple resources your reps can leverage if they don’t remember the details.

Is your software deal stuck in legal limbo? Need to get it closed to ‘make numbers’ before EOQ? If your company offers SaaS or licenses software to other businesses, consider these three tips to close deals with less legal hassle.

Don’t bury the lead

SaaS agreements and licenses that do not make the fees obvious to your customer’s counsel do no one any favors. If the deal means your customer will pay you $25,000 or less per year for three years, and their legal counsel can quickly see that, counsel will very likely treat it accordingly – hopefully with a lighter touch than a deal 20 times that size.

If you instead bury the dollars and cents deep in the agreement, or worse still – put them on a separate file your customer’s lawyer never receives – the lawyer may be more likely to spend more time and more money aggressively negotiating with you. $25,000 worth of negotiation for a $75,000 deal makes no sense. For large deals, expect a thorough review no matter where you put the financial details. But don’t encourage your prospective customer to spend more on legal expense than makes sense relative to the deal size.

Also, take a moment to describe your platform in the agreement. In my experience, agreements from some hot names in tech right now lack minimal descriptions of their platforms. If your customer’s attorney knows nothing about the offering, you’re much more likely to wind up negotiating issues that are totally irrelevant to your deal. That’s nuts. Take a moment to describe the offering, if only at the most basic level. You will save your team and your customer valuable time and legal expense.

Know your market

Are you selling into a regulated industry? If so, do you know what regulatory burdens your customers face, and if they’re changing? Does the platform you’re pitching impact your customer’s ability to comply? If you don’t know the answers to these questions, you’ll find out sooner or later – perhaps painfully.

For example, if you’re selling into the healthcare industry, you should know whether your offering will impact your customer’s ability to comply with HIPAA. You should know what a BAA is, and you should be prepared to answer why your company will or will not sign one. Another example . . . if your offering will gather information from people residing in the EU, you should be aware of European privacy law and potential changes that may impact you and your customers.

Don’t wait until your customer’s counsel brings up these and other market-specific issues during negotiation. Draft a deal that accounts for them and be prepared to explain your thinking.

Plan for what comes next

If you’re like most in the software business, you live and die with churn and LTV. You’re much less likely to see positive movement on those metrics if you don’t have a clear plan to ensure customer success with your software or platform. In other words, you need to meet customer expectations about your offering. Great software companies exceed those expectations. Others let sales teams close the deal and throw it over the wall – leaving things like implementation or integration to another day. Don’t be that guy.

One way great software companies set expectations is with a plan that the customer approves early in the relationship. This doesn’t make sense for every provider, especially low price providers, and the plan doesn’t require every little detail. But for high-touch, high-end solutions, customer users and leaders should play a role in crafting a plan that the customer approves. Be open to this, even if it impacts CAC in the short-term. It saves both you and your customer time and money in the long run, establishes trust among their users and your staff, and reduces the risk of buyer’s – or seller’s – remorse. Critically, you’ll be more likely to start customers on a path to upsells, renewals, and referrals. If your platform isn’t just “plug and play,” and your sales team already poured time and money into cultivating the deal, take a little extra time to set clear expectations and consider an early sign-off on the same.

Emerging tech companies take note – if you collect the personal data of European citizens from the United States, or otherwise transfer that data to the U.S., recent developments mean your legal obligations may change soon.

Historically, it has not been a problem to store EU citizen data in the United States. Under an agreement between U.S. and EU regulators, which is often referred to as the “Safe Harbor,” a U.S. company could transfer that data to the U.S. by certifying to the U.S. Department of Commerce that it would adhere to European privacy principles. The U.S. Federal Trade Commission, in turn, could bring enforcement actions against the company if it failed to comply. More than 4,000 companies took advantage of the Safe Harbor to transfer data to the U.S., from Amazon and Google to emerging tech companies in the upper Midwest.

Bad Alternatives

The ruling had an immediate impact on businesses of all stripes that relied on the Safe Harbor, particularly emerging tech companies. They were left with a handful of bad alternatives –

keep the data in the EU – potentially expensive or unworkable;

obtain user consent or use model contract provisions – also potentially expensive or unworkable, especially for companies already processing data on behalf of existing business customers with an EU presence; or

Worse still, the Court of Justice of the European Union ruling implicitly called into question some of these alternatives. Recognizing the problem, EU regulators gave themselves and their U.S. counterparts until January 31, 2016 to find an alternative. This set off intense negotiations among regulators.

Privacy Shield

On January 28, 2016 the U.S. Senate Judiciary Committee approved a bill that would allow EU citizens to sue the U.S. government for privacy violations. Just a few days ago, on February 2, the European Commission and the U.S. Department of Commerce announced the outline of a potential Safe Harbor replacement, dubbed the “Privacy Shield.” According to the releases:

U.S. companies will have stronger obligations to protect personal data of EU member state citizens. Among other things, they will be required to comply with the decisions of the EU data protection authorities regarding personnel data.

U.S. companies will remain subject to enforcement actions for privacy violations by the FTC, and EU privacy regulators will have the ability to refer complaints of EU member state citizens to the FTC.

If an EU citizen lodges a complaint regarding inappropriate activity by U.S. authorities, a new Ombudsperson at the U.S. State Department will review it.

Alternative dispute resolution for certain complaints will be made available for free.

The U.S. will commit not to indiscriminately conduct mass surveillance of EU citizens. S. guarantees regarding limits and oversight will be reviewed annually by the European Commission and the U.S. Department of Commerce. U.S. national security agencies will be invited to participate in those reviews.

To Be Determined

The outline lacks many details that will prove vital to providing a meaningful and lasting legal alternative for U.S. technology companies. Important outstanding questions include:

Will free alternative dispute resolution result in an increased number of complaints?

Will U.S. security agencies take up invitations to participate in annual reviews, and will those reviews be meaningful? If not, will the Court of Justice ultimately invalidate the Privacy Shield as it did the Safe Harbor?

Will the Privacy Shield be suspended if EU authorities conclude that the U.S. failed to comply with the Privacy Shield’s limits?

By when will the EU and U.S. finalize these and other Privacy Shield details? EU regulators suggested that final approval could take up to 3 months, but some EU lawmakers and privacy advocates are already arguing the Privacy Shield is not enough.

In The Meantime

While the Privacy Shield winds its way through the EU legislative process, the chair of the group composed of EU data protection agencies said the group will not take enforcement action against U.S. companies that continue to use existing legal alternatives like model contract clauses and binding corporate rules. While these alternatives may be difficult for many emerging technology companies, they currently remain likely the only legal way to collect data from the U.S. of EU citizens or otherwise transfer EU personal data to the U.S.

In this second of a two part AlphaTakes video series, Matt Storms discusses the second half of the Series A Preferred Stock term sheet for an emerging technology company, using the Series A term sheet published by the National Venture Capital Association.

Here are the key takeaways from this video:

The three most common alternatives to anti-dilution provisions:

Weighted average

Full ratchet

No anti-dilution provisions

Several provisions are not typically heavily negotiated in Series A financings:

In this first of a two part AlphaTakes video series, Matt Storms discusses the first half of the Series A Preferred Stock term sheet for an emerging technology company. He provides a summary of some of the key terms of the Series A term sheet, using National Venture Capital Association (“NVCA”) model document.

Here are the key takeaways from this video:

The NVCA documents are great resources for understanding the Series A financing, but are fairly investor friendly.